Trump-Xi takes centre stage as FX markets brace for the next move

Market overview

FX markets are turning their attention firmly towards tomorrow’s Trump-Xi summit in Washington, with the outcome capable of setting the tone well beyond USD/CNH. Trade, tariffs, AI and critical minerals are all on the table as Washington and Beijing look to preserve a fragile period of stability ahead of the current trade truce expiring in November. Any sign of progress could encourage a broader risk-on move across currencies, while renewed friction would quickly put trade-sensitive FX back under pressure.

Against that backdrop, the dollar enters the meeting from a position of strength, supported by firm US yields and a more hawkish Fed path, while the euro remains on the defensive and sterling continues to navigate its own fiscal concerns. With Trump-Xi, Iran and Japanese intervention risk all competing for attention, politics rather than economic data may dictate the next meaningful move across FX.

USD: Higher-for-longer story keeps dollar supported

President Trump’s comments at the UN General Assembly that any Iran agreement is unlikely before the November midterm elections have reinforced expectations that energy prices could remain elevated over the coming weeks. Trump said on 22 September that he expected an agreement after the 3 November elections. That keeps inflation risks alive and has helped maintain the probability of a December Fed hike at around 78% in OIS markets.

US two-year yields have risen to 4.76%, helping push DXY towards 100.7, its strongest level since July. Markets are increasingly pricing a Fed path in which previous insurance cuts are gradually reversed, providing the dollar with a solid front-end yield advantage.

The shape of the Treasury curve is also offering support. Ten-year yields are approaching 5.00%, while Treasury buybacks have helped contain longer-dated yields, leaving the 2s10s spread close to 21 basis points. This compressed curve means softer US data could initially weigh more heavily on longer maturities without immediately changing expectations for Fed policy.

Near-term risks are therefore likely to come from outside the US data calendar. USD/JPY is trading close to 157 and a move towards 160 could increase the likelihood of intervention from Japan’s Ministry of Finance. A meaningful intervention remains one of the more credible obstacles to further dollar strength.

Technically, DXY is testing 100.7, with a sustained break bringing 101 into view. Support sits around 100.3 before the psychologically important 100.00 level.

GBP: Fiscal concerns rise but sterling holds its ground

The latest UK borrowing numbers have placed fiscal policy back under the spotlight, with government borrowing reaching £18.3bn in August, £3.5bn above the OBR forecast. The cumulative deficit now stands at £77.3bn, around £8.1bn above the level projected by the OBR.

Despite the weaker fiscal picture, the market reaction has been relatively contained, with sterling showing little sign of sustained selling pressure.

Attention is now turning towards Chancellor John Healey and the October Budget. Healey was appointed Chancellor in July under Prime Minister Andy Burnham’s new government. With fiscal headroom already limited, the government may have less scope to pursue an ambitious spending programme and could instead prioritise targeted support and fiscal stability.

Paradoxically, that could prove more supportive for UK assets. Investors had previously been concerned that a broad policy agenda could test the government’s fiscal credibility. A more restrained Budget focused on stability may therefore reduce the risk of a sharper repricing in gilts and sterling.

For now, markets are likely to wait for clearer indications of the Budget’s contents before taking a stronger directional view on the pound.

EUR: Rate gap keeps euro on the defensive

The euro continues to struggle despite a somewhat more constructive geopolitical backdrop. Progress surrounding US-Iran discussions has eased some concerns surrounding energy markets, but EUR/USD remains below 1.15.

The difficulty for the euro is that relative rates continue to dominate price action. Both the US and eurozone economies have remained resilient, but stronger US data and a more hawkish Fed repricing have lifted Treasury yields and widened the dollar’s rate advantage.

Political and fiscal uncertainty within Europe is also adding another layer of resistance. Concerns over public finances and the region’s spending outlook are making it harder for the euro to attract sustained capital flows, particularly while investors remain cautious over medium-term growth.

Today’s flash PMIs will be closely watched for evidence that activity is holding up despite higher energy costs. A stronger set of figures could provide some short-term support, although recent price action suggests European data alone may struggle to overcome the wider rates differential.

The immediate bias remains towards a test of the low 1.13s. A recovery towards 1.16 by year-end remains possible, but a meaningful shift is likely to require either a softer Fed narrative or a stronger European catalyst.

Looking ahead

• Trump-Xi summit: Trade, tariffs, AI and critical minerals will be key for USD/CNH and wider risk sentiment.

• Eurozone and UK flash PMIs: Focus on whether activity is holding up against higher energy costs and tighter financial conditions.

• US rates: Further strength in front-end yields could keep the dollar supported and bring DXY 101 into focus.

• USD/JPY: A move closer to 160 would put Japanese intervention risk firmly back on the radar.

• EUR/USD: The low 1.13s remain the key downside area if rate differentials continue to favour the dollar.

• GBP: Markets will look for further detail on the October Budget and signs that fiscal discipline remains a priority.

• Energy markets: Oil remains an important input into inflation expectations and the global rates outlook.